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Retirees Are Not Necessarily Free From Liability

  • Adroit Insurance and Risk
  • March 16, 2015

This article originally featured on the Ansvar Insurance blog

Once I retire from directorship, I’m no longer liable.

If you think that once you retire from a directorship, or resign from a position on a board that you are no longer liable for claims brought against your former organisation – think again.

The vast majority of Directors & Officers Liability (D&O) policies are written on a claims-made and notified basis. This means that coverage only applies to claims that are made and notified to the insurer during the policy period or within a contractually agreed extended reporting period. Once such policy period and extended reporting period expire, the insurer will not accept any additional claims.

The usual limitation period under Australian law is 6 years from the date the cause of action accrued in contract or tort although the period varies from State to State.

As a consequence, an executive who leaves an organisation or a director who resigns or retires from a board can therefore be exposed to claims long after their tenure has concluded. Imagine being held liable yet, having no control over the organisations choice of D&O cover and ultimately your protection.

D&O policies are important as they generally cover past, present, and future directors and officers, so whilst the corporation maintains an active D&O policy, retirees can continue to be covered under the current policy.

There are however, a number of reasons why cover may not always be adequate:

  • Non-renewal – If the organisation decides not to renew its D&O policy any cover to retired D&Os shall lapse.
  • Lack of Control – After a director has retired from a board, he or she no longer has control over the nature of D&O coverage i.e. limits, terms and conditions the organisation selects.
  • Market conditions – There is a possibility that coverage and limits of D&O policies could be reduced in the future as the current competitive “soft” insurance market starts to harden.
  • Shared policy Limits and Cost savings – The issue of shared policy limits, whereby multiple insured’s and organisations “compete” for coverage limits under a D&O policy. This approach could result in significant cost savings hence seen as a viable option by future management.
  • Mergers and Acquisitions – Post acquisition by another company, new management may not be inclined to adequately protect former directors and officers.
  • Bankruptcy – Represents another potential impediment to coverage for retired directors.

Additionally, if a claim is brought against a retired director, even if they have passed away, their personal estate or assets could still be at risk. It also means their surviving spouse or family would end up just as exposed and be left with settling the claim if the appropriate insurance had not been purchased.

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